The great gamble of locking up your cash
A new 10-year bond is paying a glittering 4 per cent, but can that rate justify such a long commitment by savers, asks Chiara Cavaglieri
Saturday 23 November 2013
If you're on the hunt for any sign of life in the dead zone that is the current savings market, a new bond paying 4 per cent should offer some hope. Naturally, it comes with a sting in the tail – you have to lock your money away for 10 years – but with variable rates routinely paying a shameful 0.67 per cent, is it a gamble worth taking?
Leeds Building Society's brand-new, 10-year, fixed-rate bond pays eight times the Bank of England base rate, which was dropped down to a low of 0.5 per cent in 2009 and has been stuck there ever since. The last time there was a savings account paying 4 per cent was September 2012 and that was a five-year, fixed-rate bond from Halifax.
For a saver with a pot of £50,000, the monthly income – which is paid into a separate account – Leeds BS would be paying £166.66 (£133.33 after basic tax). The top-paying five-year deal from Tesco Bank pays monthly interest at 3.01 per cent, which equates to £125.41 per month (£100.33 after basic tax).
If income now rather than later is the primary concern, the Leeds bond pays an extra £1,980 in the first five years. If you are approaching or in retirement and so looking for safety, stability and as much money as possible coming in now, this 10-year bond could be a punt worth taking.
Andrew Hagger of the personal finance site Moneycomms.co.uk says: "Understandably, many people feel that 10 years is too long not to have access to their capital, but for those with the sole intention of getting the best monthly income they can from their nest egg, the 4 per cent rate will look very tempting".
The banks and building societies offering attractive rates on the longest bonds are taking calculated gambles that base rate will rise before they come to an end, which will mean they make extra profit. If they get it wrong and rates stay low, however, it is the long-suffering savers who will come out on top. Even when rates do rise, we can reasonably expect it to be a relatively slow process and it seems just as likely that many providers will take their time to pass on the increases to savers.
Mr Hagger points to the 10-year fixed-rate savings bond from Birmingham Midshires, which was launched in the summer of 2008 and, at the time, was thought to be too much of a risk by many people.
"In hindsight the rate of 6 per cent on offer at the time would have turned out to have been a very shrewd move," he says.
Only time will tell whether such a long fix at this rate represents great value, but even the experts and economists don't know with any certainty when rates will rise and this has made long-term fixes tricky to assess.
Ultimately, the decision must come down to your specific needs, but even if you don't need the income now, 10 years is a long stretch. There have been predictions that the first movement in base rate might come as early as summer 2015. If that is the case and rates start creeping up beyond 4 per cent, you could be stuck with an uncompetitive deal for another eight years.
Danny Cox, head of financial planning at Hargreaves Lansdown warns that 10 years is a long time to tie up your savings in cash when life has a habit of throwing curve balls at you, particularly if inflation is eating away at the value of any savings you do manage to grow over that time.
Mr Cox explains that if inflation were to rise above 3.2 per cent for a basic-rate taxpayer, or 2.4 per cent for a higher-rate payer, the 4 per cent on offer from Leeds BS would not be able to keep pace with rising prices.
"The rate on this bond is nowhere near good enough. The probability is that interest rates will rise long before the 10-year term is up and 4 per cent will look even worse value in the future than it does now," he says. "With equity-income funds paying dividends alone of nearly 4 per cent, with the potential for capital growth as well, this is where my longer-term savings are going."
If you are determined to keep your savings in cash, by far the biggest problem is finding a suitable alternative. At present, the average no-notice account pays an embarrassingly low 0.67 per cent, according to Moneyfacts.co.uk. In Isa (individual savings account) territory, the average variable account pays just 1.36 per cent, which only climbs to 1.94 per cent for fixed-rate Isas. Even if you bag the best-buy Isa from Virgin Money (Issue 70), you still earn only 3 per cent, fixed for five years until 2018.
Many current accounts are actually offering better value for savers at the moment. For example, the FlexDirect current account from Nationwide BS pays 5 per cent gross on balances up to £2,500 for the first 12 months (falling to 1 per cent thereafter). Clydesdale and Yorkshire banks pay 4 per cent on balances up to £3,000, although this drops to 2 per cent in March 2015, while the Santander 123 current account, which carries a monthly fee of £2, pays up to 3 per cent on balances of £3,000 to £20,000, 1 per cent on £1,000-£1,999 and 2 per cent on £2,000-£2,999. With all of these, you must either maintain a minimum credit balance to get the interest, or pay in a minimum amount each month.
- 1 Cyclist who knocked down three-year-old girl says his life has been 'destroyed'
- 2 Chelsea victory parade: Chelsea mocked on Twitter as 'tens of fans' pack the streets of London
- 3 US warned by Chinese media to stop meddling or 'war will be inevitable'
- 4 Woman, 21, dies after taking contraceptive pill that 'caused fatal blood clot'
- 5 Isis burns woman alive for refusing to engage in 'extreme' sex act, UN says
As a white man, I'm surprised more women aren't tweeting the hashtag #KillAllWhiteMen
Scotland may have to leave the EU even if it votes to stay in, David Cameron confirms
The day that Britain resigned as a global power
SNP fury as HS2 finds 'no business case' for taking fast train service to Scotland
A nation of inequality: How the UK is failing to feed its most vulnerable people
EU referendum: David Cameron to deny EU migrants and under-18s the chance to vote
iJobs Money & Business
£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...
£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...
£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...
£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...
Day In a Page
On the market for the first time in more than 50 years, this six-bedroom home is a project with vast potential - spread over three floors of living space.
This five-bedroom home comes with a range of outbuildings including a large barn which could be converted into a self-contained granny-flat or rental.
Surrounded by rolling countryside, this four-bedroom barn conversion comes with a self-contained, one-bedroom annexe that could serve as an office or a holiday let.
Located near Harrogate town centre, this five-bedroom Victorian terrace is arranged over three storeys while a current study serves as an optional sixth bedroom.
A ground-floor flat in a country house, located a mile from Sway; this two-bedroom home would make an ideal weekend retreat on the edge of the New Forest.
On a popular residential lane in Caterham on the Hill, this four-bedroom family home offers a secluded garden and a convenient location for local schools and public transport.
Just a short walk from Westerham green, this three-bedroom cottage has a light kitchen with exposed brickwork and double doors that lead to a south-facing garden.
In a prime spot opposite the River Thames, this one-bedroom flat has an 18sq ft reception room with glass doors that open out to a private terrace.
Set in the hills above Llanwrda Village, west Wales, this 18th-century three-bedroom farmhouse has holiday-let potential from a separate barn conversion and annexe.
This charming end-of-terrace townhouse is arranged over three floors, with two double bedrooms and a private courtyard garden located at the rear of the property.
This four-bedroom Edwardian home offers a combination of original features and contemporary design after a renovation by the current owners.
Located in the University area, this semi-detached five-bedroom home is arranged over three floors - there's even a rear garden and off-road parking too.
Only a few minutes' drive from the charming town of Marlow, this two-bedroom home sits on the private riverside estate of Harleyford.
This detached four-bedroom home in Middleyard is arranged over two floors, with features that include a wood-burning stove and bespoke oak staircase.
In a row of eight detached Georgian residences, this five-bedroom home offers views of The Sound, Mount Edgcumbe and Cornwall from its impressive veranda and full-length balcony.
If you love cooking for friends this two-bedroom flat - complete with views of the iconic Battersea Power Station and an open-plan kitchen/dining area - will go down a treat.
Located above Grasmere village, this five-bedroom home is arranged over three floors and offers countryside views across Grasmere Lake towards Silver Howe.
Surrounded by the Western fells, this five-bedroom Georgian home retains many original features including panel-plastered ceilings, sash windows and fireplaces.
This six-bedroom home is set amongst three acres of grounds. Currently a large family home, Clift Hill has potential to make a B&B, subject to change of use permissions.
A former period coach house, Glebe Farm Stable is now a three-bedroom cottage with a double car barn, office, kennels and an outbuilding that's currently used as a gym.
Set sail for this four-bedroom farmhouse in Cowes. With five acres of land and an indoor pool, this home oozes character. There is even potential to let a one-bedroom annexe.
Surrounded by woodland, this five-bedroom manor house has plenty of outdoor storage space in the form of three converted loose boxes, two smaller outhouses and a woodstore.
This four-bedroom detached home comes with a double carport, useful workshop, garden and two walkways that offer views of the adjacent countryside.
With space for an equestrian business, a greenhouse for growing your own veg, a wine store and a gym; this five-bedroom home has all the ingredients for a country retreat.
This four-bedroom home has exposed brick chimneys and a vaulted ceiling in a breakfast room that's ideal for summer entertaining - the doors open to the patio and garden.
The decked roof terrace of this two-bedroom flat is perfect for summer drinks while large windows and ample storage space make for a light and spacious interior.
Surrounded by approximately 15 acres of grounds, this six-bedroom grade II-listed home has been extensively refurbished yet retains many period features.
This four-bedroom home comes with a two-bedroom cottage and commercial office, with planning to extend, in a stunning courtyard setting.
In a pretty Norfolk village, this four-bedroom family home is surrounded by landscaped gardens, with even a self-contained annex for guests.
A few miles from the seaside at Perranporth, this four-bedroom farmhouse sits amongst nine acres of idyllic grounds - including a lake and two barns used as holiday lets.
This five-bedroom home is arranged over three floors of a converted Victorian hospital, offering spectacular views of the Pentland Hills - only three miles from the city centre.
This four-bedroom detached home comes with grounds that span to approximately 2.5 acres, as well as two large patio areas and a double garage.
This four-bedroom cottage is a Grade II-listed town house, well-located for the thriving market town of Nailsworth.
A four-bedroom apartment on the ground floor of a stunning period property in North Yorkshire, with two kitchens and a large south-west facing garden.
This high-spec two-bedroom home is part of a smart collection of new flats at Beaufort Park and has a large decked balcony that's perfect for summer drinks.
Capitalise on the fabulous views of Trevone Bay by taking two homes and creating one spacious boutique B&B. Just a cliff-top walk from Padstow.
Overlooking a golf course, this six-bedroom Edwardian detached home spans four storeys and retains many period features including the original, operational servants' bells...
On the edge of the city, this six-bedroom home comes with an outdoor swimming pool and a large garage block that has annexe potential.
In a Grade II-listed manor just outside of Bath, this three-bedroom home is arranged on two floors with a skylight in a vaulted roof line.
Open the living room's bi-fold wooden doors to reveal a retro-style kitchen, and a conservatory leading to a paved garden at this three-bedroom home.
A Grade II-listed, four-bedroom home, in a charming Somerset village, with a two-storey studio that could be converted into a holiday cottage
A modern four-bedroom Victorian home, within walking distance to the high street
A luxury apartment in the Gothic mansion of Wyfold Court in Kingwood, offers six bedrooms spread over three floors and a turret
This school conversion, near Stockwell Tube, oozes New York loft style. The one-bedroom flat features double height ceilings and exposed brick work
This six-bedroom Georgian home is on three floors with open fireplaces, a two-oven Aga, an annexe, and cottage gardens with outbuildings and a car barn
High Crest House covers an impressive 9384sq ft, with almost three acres of grounds including a tennis court and summer house enclosed by electric gates
A six-bedroom farmhouse with separate accommodation in converted stables. Situated in the village of Church Aston, within walking distance to the market town
A two-bedroom flat with under-heated walnut floors and bespoke built-in storage. The Tube and Clapham Common are a short stroll away
A refurbished seven-bedroom townhouse with staff quarters, cinema room, superb gym, steam room and plunge pool
A minimnalist four-bedroom home designed to the highest spec, featuring glass walls and a kitchen space lit by a glass roof